Victoria’s Secret & Co. (NYSE: VSCO), the lingerie and apparel retailer, suffered its worst one-day fall in more than a year after a Q2 earnings beat was overshadowed by weak third-quarter profit guidance.
Shares closed yesterday at $73.64, down 13.17% from the prior close of $84.81.
Victoria’s Secret reported Q2 revenue of $1.61bn, up 10% year-on-year and only fractionally below the $1.62bn consensus, while adjusted earnings per share of $0.95 crushed the $0.77 estimate. Adjusted operating income of $124m also beat the $101m estimate, and comparable sales grew 9%. Segment revenue showed North America stores up 9% to $897.9m, direct up 8.1% to $439.4m and international up 20% to $273.4m.
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Despite that strength, third-quarter operating income guidance of just $10m to $20m came in well short of Wall Street’s expectations, even though third-quarter revenue guidance of $1.57bn to $1.60bn was broadly in line. Full-year revenue guidance was lifted to $7.10bn-$7.18bn, still below the $7.2bn analysts had projected, while full-year adjusted operating income guidance rose to $560m-$590m and adjusted EPS guidance was set at $4.45-$4.70.
The gap between a solid quarter and a weak forward margin outlook explains the scale of the reaction. The stock had entered the print trading near 15 times earnings, above historical valuation norms, leaving little room for a margin disappointment.
Broker Jefferies called the results solid but noted the shares had entered the quarter trading above historical valuation norms, meaning much of the improvement was already reflected in the price, and kept a Hold rating on the stock.
The reaction shows how a richly valued retailer can still be punished for soft margin guidance even when headline sales and earnings numbers beat expectations.
